Retracement Trading Strategy

This strategy was devised by [highlighter color=”yellow-mute” ]Trader Jay[/highlighter] as a way of helping traders overcome a major obstacle encountered when trying to catch the right moment to enter a trade on an asset that is undergoing a pullback or retracement.

Retracements are an integral part of trading the Forex markets. Prices do not move in a straight line, but take a direction that looks like a crest and trough pattern. This occurs when the price of goes up or advances and subsequently comes back down or retraces. This behaviour in the price is displayed because traders who initially bought in to the move aiming to make a profit, take their money off the table when they done so periodically. At some point, the profit-taking will end as prices retreat to levels where the original beneficiaries of the price action move in to continue from where they left off. In technical trading, this process evolves over time but in the fast-paced world of news trading, this process occurs very rapidly.

This strategy was designed to help traders trade the retracement technically on the daily charts in such a way that the trade can evolve over a few days and enable the trader to make money from the strategy. This is a very simple strategy that any trader can use. All it requires is patience – the ability to wait for the technical setup to form completely and the compsure to be able to follow the trade to its logical conclusion whether that is a profit or loss.

Time Frame

This strategy is meant to be traded strictly from the daily charts. This may take days to setup and will take even more time to resolve fully. So if you are the type that has itchy fingers and would prefer chasing pips all over the place, this strategy is not for you. But if you are tired of constantly throwing money away and want to do things the way the institutional traders do them by taking a trade that is assured of bringing at least 300 pips on maturity, then this is for you.

Indicators

Only 2 indicators are necessary for this strategy:

a) Fibonacci retracement tool

b) Stochastics oscillator (set to 10,3,3)

The Trade Setup

The concept behind this trade is to pick the point at which the retracement from a prior trend ends. The trader must therefore do the following:

a) Identify the previous trend. The daily chart is the only way to do this. Trying to pick out the previous trend in shorter time frame charts will lead to errors, because moves on those charts do not reflect the true long term sentiment of the institutional traders whose volume pushes price on the charts.

b) Once the retracement starts, setup the indicators by tracing the Fibonacci retracement tool from the swing high to swing low (for a downtrend) and from the swing low to swing high on an uptrend. Then you can insert the Stochastics oscillator on the chart.

There are five retracement lines traced by the Fibonacci retracement tool. The strategy is to predict with a high degree of accuracy, which of these lines will serve as the takeoff point following a retracement of the price from previous highs. This is achieved by noting where the Stochastics oscillator performs its famed crosses:

– Lines crossing below 25 for a retracement from an uptrend

– Lines crossing above 75 for a retracement from a downtrend

Long Trade

Place a Market Buy order when the Stochastics lines cross at >75 at a Fibonacci retracement from an uptrend. Trade should be opened at open of next candle. SL (Stop Loss) to be set beyond the next support level.

Short Trade

Place a Market Sell order when the Stochastics lines cross at <25 at a Fibonacci retracement level when prices retrace upwards from a downtrend. The trade should be opened at the open of the next candle. Stop loss should be set beyond the next resistance level.

This demonstrates a good way to make money from retracements, especially when the trader has missed the boat earlier.